Marijuana – How Much Revenue?

Old revenue estimates for marijuana taxes have just made way for new, more informed ones. An official 2012 Washington State legislative revenue estimate called for $1.9 billion in marijuana taxes by the end of Fiscal 2017. On February 19, the Governor drastically cut that questionable number, with a new, lower estimate calling for around $155 million during that time frame.

That $155 million number does not show up in print yet. It comes from adding up and rounding off (1) the $28 million estimated to go into the general fund from sales and B&O taxes and (2) $125 million. That $125 million number (this gets tricky) comes from knowing that the nearly 20 percent of excise revenues estimated for the general fund are $23 million — thanks to Steve Lerch, an old friend from Joint Tax Committee staff in D.C. who now heads up estimating for the State of Washington, who graciously clued me in. (Multiplying by a little over 5, the inverse of 20 percent, gets to $125 million.)

The basis for those new Washington numbers comes from a thoughtful analysis led by Jon Caulkins, a top drug policy scholar who has gone out of his way to help me over the years, though we have met only electronically. But even with all this expertise, the numbers are iffy. For instance, the Washington estimate assumes that retail sales won’t start before mid-2015, and I would bet sales start much earlier.

In Colorado, the estimate for marijuana taxes went up, not down. An official 2013 legislative estimate called for $67 million a year. As of February 18, the Governor is officially expecting around $100 million a year — $184 million over the first 18 months.

Both states estimate that revenue will increase over time. But both have percentage-based taxes, which shrink when pre-tax prices fall.

We’ll soon have a clue: In March, Colorado is to report taxes marijuana businesses paid for the month of January. So when Colorado reports, to know long-term, sustainable annual revenue, do we take the January number and multiply by twelve? Not really.

At first, suppliers can charge high prices: That’s what happens in Economics 101 when low supply meets high demand. Supply in Colorado in January was low. Suppliers were gearing up, dealing with startup pains, and amortizing huge expenses for professional fees and the costs of raising capital. Demand may have been unusually high, on account of novelty and pilgrimages to the first legal state. And seasonality may add to demand: even pre-legalization, January trailed only March and the summer months in overnight leisure trips in Colorado in 2011; in 2010, it trailed only three months.

Over time, as the market matures, efficiencies, experimentation, and economies of scale will drive pieces down. And new market entrants will start selling. Colorado can expect to see lower prices (which reduce tax collections) – but higher unit sales (which increase tax collections). With prices declining, and volume increasing, Colorado’s January collections may be more or less than a twelfth of the year’s. (A safe bet.)

But at some point, market forces will drive pre-tax prices down to a fraction of pre-legalization levels. At some point, unit volume will stabilize. Bootleggers will eventually be marginalized to the point of triviality. With a tax Constitutionally based on percentage of price, Colorado’s revenues will peak and start to decline. So will Washington’s.

Other states have learned. None of the serious proposals for legalization in 2014 uses percentage of price. Using weight rather than percentage are bills in Maine, Maryland, New York, and Rhode Island – and an initiative in Alaska.

Can Colorado and Washington adjust to changing market conditions?

Colorado’s Taxpayer Bill of Rights ties its Legislature’s hands: No tax increase without a referendum. (Ordinarily, there isn’t much hurry.)

Washington is more nimble. The Legislature can amend the marijuana law. For two years, two-thirds of each House must agree, but after that, anything can happen. Washington may be flexible enough to adjust and charge what the market will bear. Washington may also choose to adjust market size, which it now limits strictly in an attempt to prevent the kind of leakage to kids and other states the federal government doesn’t want.

For the time being, as estimates fluctuate, we are in the dark. It will be years before we get a precise idea of what to expect from the primitive marijuana taxes in Colorado and Washington.